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Amidst the hustle and bustle of daily business activities and the peripheral noise about non-compete agreements, the basics may get lost. Therefore, it is useful to periodically return to first principles.
With respect to non-compete agreements, the starting point, of course, is whether such agreements are even valid or enforceable. In Texas, they are. See Tex. Business & Commerce Code section 15.50.
Employers (and others) can enforce non-compete agreements and sue those who breach them in Texas courts. To sustain a claim under Texas law for breach of a non-compete agreement, the claimant must show: (1) the non-compete agreement is enforceable; (2) the defendant violated the non-compete; and (3) the defendant does not have an affirmative defense. In re Gomez, 520 B.R. 233, 237 (Bankr. S.D. Tex. 2014) (applying Texas law).
On that first prong, a non-compete agreement is enforceable in Texas if:
- It is ancillary to or part of an otherwise enforceable agreement at the time it is made;
- It contains a reasonable time limitation on its duration;
- It contains a reasonable limitation as to the geographic area it covers; and
- It contains a reasonable limitation on the scope of activity restrained that is not greater than necessary to protect the company’s goodwill or business interest.
Tex. Business & Commerce Code section 15.50.
Not surprisingly, there has been substantial litigation concerning each of these requirements. Confronted with allegations that they have breached a non-compete agreement, defendants frequently challenge their enforceability. As such, courts have been asked to clarify when a non-compete agreement is ancillary to an otherwise enforceable agreement and are routinely asked to determine whether specific limitations to time, geography, and/or scope of activity are reasonable. Such determinations are often driven by and sensitive to the specific facts and industry involved.
Employers attempting to enforce a non-compete agreement should expect the defendant to contest the reasonableness of the agreement’s limitations. Defendants regularly claim the agreement is overly broad, as such, and cannot be enforced. In response, the employer/company routinely asserts reasonableness of the limitations and articulates why the limitations are necessary and appropriate. Usefully, too, in Texas the proper remedy for overbreadth of a non-compete provision is reformation, not a declaration that it is unenforceable. See Tex. Business & Commerce Code section 15.51. This so-called blue penciling allows the employer/company to advocate for enforcement of the agreement with some reformation of the limitations rather than complete rejection of the agreement as unenforceable.
Employers With Unionized Workforces Should be Wary of Requiring Employee Noncompetes Without Union Negotiation
In various industries across the country, it has become increasingly common for employers to require employees to sign noncompete agreements that restrict their employees’ ability to compete against the employer and/or solicit the employer’s customers upon leaving the employer’s employ. And employers have become increasingly savvy in drafting noncompete agreements that are reasonable in time, geographic scope, and industry. Indeed, there has been substantial litigation over these issues in jurisdictions nationwide.
But what if the employer has a unionized workforce? Can the employer still individually require employees to execute noncompete agreements without negotiating with the union?
Perhaps not. On Friday, a three-judge panel of the U.S. Court of Appeals for the District of Columbia unanimously rejected an employer’s contention that it could unilaterally impose a noncompete and confidentiality agreement without negotiating with the union. Instead, the appellate court agreed with the National Labor Relations Board that doing so may violate federal law. See Minteq Int’l, Inc. v. NLRB, 2017 WL 1521553 (D.C. Cir. April 28, 2017).
In 2012, Minteq started requiring new employees to sign a Non-Compete and Confidentiality Agreement (NCCA). At that time, however, Minteq’s employees were represented by the International Union of Operating Engineers, Local 150, AFL-CIO and covered by a collective bargaining agreement (“CBA”). Nonetheless, despite its unionized workforce and governing CBA, Minteq didn’t give the union notice or an opportunity to bargain regarding requiring new employees to sign the NCCA. Therefore, in 2014, the Union filed an unfair labor practice charge against Minteq for its failure to bargain with the Union over the NCCA. After proceedings before an ALJ and an appeal by Minteq, in 2016, the Board held that the NCCA was a mandatory subject of bargaining not covered by the parties’ CBA. Therefore, it held that Minteq violated the Fair Labor Standards Act by implementing it without first bargaining with the Union. The NLRB concluded that Minteq violated section 8(a)(1) and (5) of the FLSA because Minteq failed to afford the employees’ union notice or an opportunity to bargain over its unilateral implementation of the requirement that employees sign the agreement.
The Court agreed, concluding that the NCCA was a mandatory subject of bargaining and that imposing the NCCA requirement on hiring was an unfair labor practice. “It was therefore unlawful for Minteq to unilaterally implement the entire NCCA.”
Although the Court’s determination was driven in large part by the NCCA at issue and the CBA in effect at Minteq, employers with unionized workforces or otherwise applicable CBAs would be wise to closely scrutinize their agreements and governing law under the FLSA before instituting non-compete agreements. Proactive analysis and planning may permit employers to achieve their desired results without running afoul of the FLSA and engaging in unlawful labor practices.
With increasing job mobility, lower profit margins and heightened competition, and the ease of access to confidential information, more companies across various industries require their employees to execute non-compete and/or non-solicitation agreements. Employees may still retain the ability to move jobs but they may be restricted in their performance of those new positions, particularly when moving to a competitor in the industry.
On April 13, 2015, Citibank initiated litigation in New York to prevent a former vice president of its private banking division, Citi Private Bank, from using its client information to solicit business in his new position with one of its direct competitors. Citibank argues in its lawsuit that the former vice president, Mourra, is improperly utilizing confidential information, namely client lists and contact information, to reach former clients and solicit them to move their business to his new company. In this case, the conduct allegedly runs afoul of a one-year non-solicitation clause and a confidentiality provision in his employment agreement with Citibank. As is typical of most litigation over non-compete and non-solicitation agreements, Citibank initially seeks an injunction preventing Mourra from communicating with his former clients and using Citibank’s confidential information.
As part of its effort to prevent Mourra from soliciting former clients, Citibank makes a point of alleging that he did not originate any of the former clients himself. Instead, as Citibank claims, the 49 families with about $5.7 billion in assets under management either had existing relationships with Citibank or were originated by other employees and serviced by Mourra. The point is, none of the clients were actually his individual clients and the only way he had any contact with them was due to his employment with Citibank. As such, the argument goes, the information was confidential to Citibank, was only available to Mourra because of his employment with Citibank, and could not be properly used by Mourra in his new position with a direct competitor.
Employers and employees alike must remain sensitive to non-compete and non-solicitation issues, especially in an era of increasing job mobility and heightened competition for often limited or finite business resources. And customer or client lists may be of sufficient value – in this case $5.7 billion in assets – to warrant litigation.
Citibank NA v. Mourra, Case No. 651215/2015 (Sup. Ct. NY)
In most jurisdictions, including Texas, to be enforceable a noncompete agreement must be reasonable in the scope of its geographic limitation and in the scope of activity restrained. Much litigation has arisen concerning whether specific geographic and/or activity limitations were reasonable under certain circumstances. But what if the noncompete agreement is silent?
A recent 8th Circuit decision, applying Arkansas law, upheld judgment on the pleadings against an employer whose noncompete agreement failed to set forth its geographic scope or the scope of activities proscribed. The noncompete agreement provided:
COVENANT NOT TO COMPETE: The Employee agrees that during the term of this Agreement, and for two (2) years following termination of this Agreement by the Company, with or without cause; or, for a period of two (2) years following a termination of this Agreement by the Employee, the Employee will not directly or indirectly enter into, be employed by or consult in any business which competes with the Company
The 8th Circuit agreed with the district court that this noncompete agreement was overbroad and unenforceable. The Court concluded that “a blanket prohibition on [the employee]’s ability to seek employment of any kind with an employer in the nanotechnology industry anywhere in the world is unreasonable and thus unenforceable.” Moreover, it made this determination on the employee’s motion for judgment on the pleadings, before any discovery had been taken by either side.
In its opinion, the appellate court was troubled that the noncompete agreement included no express limitation whatsoever on either the geographic scope or the type of activities restricted. Even recognizing the possibility that a worldwide geographic scope could be reasonable in certain contexts (here, the employer argued it engages in global business and competes with nanotechnology companies around the world), this noncompete on its face still fails because it “prohibits [the employee] from working in any capacity for any business that competes with the company.”
Employers should take the time on the front end to consider their needs with respect to trade secrets and employee competition, and draft noncompete agreements that reflect those needs. Doing so, with language in the noncompete agreement specifying the activities restrained (e.g., soliciting clients, using confidential information or trade secrets, etc.) and the geographic scope, puts employers in a far better position to judicially enforce the agreements and protect their legitimate interests. Overreaching in either respect is likely to fail.
And employees subject to such agreements should hone in on the actual language used and compare that to the employer’s legitimate needs. There is certainly ample room to maneuver with respect to arguing what constitutes an unreasonable restriction.
NanoMech, Inc. v. Suresh, No. 13-3671 (8th Cir. Feb. 6, 2015)
It is axiomatic in Texas that in order to be enforceable, a noncompete agreement must, in addition to other requirements, be reasonable in the scope of its geographic limitation. This is not an uncommon requirement, as a recent case out of Missouri shows.
When an employee left to pursue employment with another company, Sigma-Aldrich Corporation sought injunctive relief, attempting to enforce a noncompete agreement with that employee, Omar Vikin. In relevant part, the noncompete agreement prohibited Vikin from working for companies that sell competing products in locations where Sigma-Aldrich “markets or sells” products. The trial and appellate courts agreed with Vikin that this did not constitute a reasonable geographic scope without any specificity of limitation on the class with whom contact was limited.
The appellate court concluded that the noncompete “creates a global prohibition in which Sigma attempted to ban employees from working for any of its competitors globally in any capacity.” That global prohibition was an unlawful restraint on Vikin’s right to compete.
Employers and employees alike should pay particular attention to the scope of the noncompete agreement’s restrictions.
Sigma-Aldrich Corp. v. Vikin, No. ED100575 (Oct. 14, 2014)
Jimmy John’s, the sandwich chain known for marketing its “freaky fast” delivery of food, recently found itself subject to national media attention and, now, congressional scrutiny over alleged noncompete agreements it requires its employees to sign.
In a proposed class action wage dispute filed against Jimmy John’s in July, the employee-plaintiffs recently included with an amended complaint what purports to be the company’s noncompete agreement. According to that noncompete the plaintiffs submitted, employees cannot work at any business within 3 miles of a Jimmy John’s location that earns more than 10% of its revenue from selling “submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches” for up to two years after their termination. And rather than being limited to executives or key position-holders, the noncompete apparently applies to the entire workforce.
Once the agreement was publicized in the national media last week, questions arose as to the reasonableness of its scope and whether it is reasonably tailored to protect a legitimate business interest. Those initial questions and publicity led this week to as many as 37 members of the U.S. House of Representatives urging the Department of Labor and Federal Trade Commission to investigate the situation.
Regardless of how the issue and the underlying litigation are resolved, the situation serves as a potent reminder to employers that they must critically evaluate the need for and the scope of noncompete agreements.
Brunner v. Jimmy John’s Enterprises, Inc., Case No. 1:14-cv-05509 (N.D. Ill.)
In recent years, it has become increasingly common for employers to require their employees to enter into noncompete agreements. Generally, these agreements restrict an employee’s ability to work for a competing company in the same or similar industry and/or using the original employer’s trade secrets or goodwill. By its terms and design, a noncompete agreement restrains the employee’s future employment.
In Texas, the courts routinely enforce reasonable noncompete agreements. By statute, in fact, “a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promise.” Tex. Business & Comm. Code 15.50(b).
The increased use of noncompete agreements has led to significant disputes over their enforceability as employers seek to protect their business interests and employees attempt to leverage their skills and experience within an industry. To be enforceable in Texas, generally a noncompete agreement must:
- Be ancillary to another enforceable agreement (e.g., business sales contract, employment agreement)
- Be supported by consideration (the employer must give the employee something of value in exchange for the employee’s promise not to compete)
- Be reasonable in geographic scope
- Be reasonable in time
- Be reasonable in the scope of activity restrained
- Be tailored to protect the employer’s legitimate business interests
With each of these requirements comes room for disagreement and litigation, often requiring a case-by-case analysis of reasonableness. The answer may widely vary by employee position, employer, industry, and, of course, the specific terms of the noncompete at issue.